Shenzhen share transfer affects Ping An

A curious share transfer in Ping An Insurance raises eyebrows.

China's second largest insurance company Ping An Insurance, which boasts three global investors in HSBC, Morgan Stanley and Goldman Sachs, is to see an almost 7% stake held by the Shenzhen City Finance Bureau transferred to a Hong Kong-listed company, Shenzhen Investment, according to press reports in China. Ping An Insurance is due to list in Hong Kong this year, although it's not clear whether it will keep to that schedule.

Observers say the share transfer is mysterious. It is not clear why Shenzhen Investment, a company with no affiliation to the insurance sector, would be interested in the shares; nor is it clear how the company, with a net profit of just RMB60 million ($7.3 million) last year, will pay the more than RMB1 billion the shares are valued at.

But observers speculate that that one result could well be that Ping An chairman Peter Ma will strengthen his grip over the company: the sale represents the exit of the last of the original five shareholders - except for the two companies set up to hold the shares of the employees. These last two hold a stake amounting to 17% and represent Ma's effective power base.

The Shenzhen City Finance Bureau was one of the original shareholders when the insurance company became a shareholding company in 1997. The others were ICBC, China Merchants, COSCO Group and the company set up to hold shares on behalf of the staff. But the company's roots go back to 1989, when it was set up in Shekou in Guangdong by ICBC (49%) and China Merchants (51%).

ICBC exited in 1999 under guidelines that proscribed the scope of a bank's activities. The shares were transferred to Shenzhen Asset Management Company – a move that earned the thanks of the Shenzhen city government and helped smooth out important issues such as land usage rights and urban working permits.

China Merchants exited in 2001, apparently when it realized it would never realize its objective of becoming the controlling shareholder. COSCO sold out last year.

The Shenzhen city government's still considerable interest is therefore represented by the finance bureau's stake, diluted down to 6.93% currently, and the stake held by the asset management bureau, amounting in total to 19.39%.

Ma's alternating conflicts and reconciliations with his state shareholders are an interesting reflection of how difficult it is to define a company as privately or government owned in China – especially when government ownership can vary between central government ownership and provincial government ownership.

Ma is generally recognized as the driving force behind Ping An's remarkable growth in recent years. Despite his desire to escape the influence of his largest investors, he has clearly been helped by his ties to the banking and logistic interests represented by ICBC, China Merchants and COSCO. ICBC, for example, insisted that customers who took out loans had to choose Ping An insurance products while COSCO pushed Ping An's products in the logistics milieu, especially via its connections with the ministry of communications.

But Ma has always wanted to drive the development of the company his way – not immediately a straight forward prospect since he was originally answerable to the chairman of China Merchants, who had appointed him, and who could have fired him at any time. That's why Ma set up the companies that held the stakes set aside for his staff in 1989, and in 1993 he secured the investment of Goldman Sachs and Morgan Stanley. All these additional investors helped to dilute the equity stakes of the original investors.

At the same time, Ma changed his status to chairman of Ping An on the back of his chairmanship of the companies owning shares on behalf of the company's staff – thereby eliminating the power of China Merchants to terminate his position.

Finally, Ma went on a fund raising binge in the same year, broadening the investor base to 70 and making it more difficult for the original shareholders to control his actions. HSCB took a 10% stake last year for $600 million but the bank is not interested in the day-to-day management of the company, although it has seats on the board.

The role played by the Shenzhen city government is a good example of how Ma has handled his relations with the big players. Right at the beginning, Ping An had refused a request by the government to transfer a stake in the company to the Shenzhen cit government. However, he later did sell a 5.2% stake, and the stake got bigger after ICBC pulled out and transferred its stake to the Shenzhen Asset Management Bureau.

The Shenzhen authorities initially helped Ma out, but they were unhappy when he began his expansion into Shanghai. As Shenzhen's financial power is on the wane since new companies were forbidden to list on its stock exchange, this move to Shanghai by one of their own was viewed very dimly. Ping An committed a large sum of money to setting up a second headquarters in Shanghai's Lujiazui district. In retaliation it is understood that Ping An was warned by Shenzhen city officials that many of the most favorable government policies might be rescinded. However, Ma has continued to increase the staff in Shanghai, where the company is engaged in a fierce battle with the US insurance giant AIG.

Industry sources say that the share transfer should not affect Ping An's IPO, originally planned for the end of this year. But the company requires State Council approval since it is one of the first mainland finance groups to list in its entirety. And the China Securities Regulatory Commission as well as the China Insurance Regulatory Commission are involved in examining and approving the case, which slows progress.

"If the bureaucrats move fast, everything could be settled in the next couple of months. If they move at their more usual pace, we'll be coming up to Christmas, at which point the Hong Kong investment bankers could be going on holiday," one banker was quoted as saying in the Chinese press. That would make a listing more likely next year.